The Federal Open Market Committee opted to lower the
federal funds rate by 50 basis points to 5%, noting that
risks were biased toward a weakening of the economy in the
foreseeable future. In a related action, the Board of
Governors also approved a 50 basis point reduction in the
discount rate to 4.5%.

The fed funds rate is the rate at which federal reserve
banks loan money to each other on an overnight basis, and
moves are frequently reflected in the prime rate of various
banks. In turn, the prime rate, or prime rate plus
some factor, is commonly used to establish the interest
rate charged on loans taken against participant 401(k)
balances.

Third Time a Charm?

It was the third rate reduction of the year for the Fed
which noted a restraint in both investment and consumer
spending as pressured profit margins hit both corporate
bottom lines and household consumption.

The Fed’s statement acknowledged a build up in excess
capacity, and suggested it would be monitoring that
situation closely.

The Fed’s next meeting is on May 15, though another cut
prior to that meeting is already anticipated by a number of
economists.

Immediately after the Fed’s announcement, a number of
banks announced they were lowering their prime rate to 8%
from 8.5%, effective tomorrow.